Friday, April 20, 2018

Property taxes in the MD of Pincher Creek - Part 2

Jonathan Skrimshire - The 2018 property tax rates and tax levies for the Municipal District of Pincher Creek were released April 10 and reported in detail in these pages. This followup piece presents the changes in the composition of the MD's assessment base for 2018, examines the relationship between the assessment base and the property tax levies, takes a short look at the process of selecting tax rates, and presents some comparative data on residential rates in neighbouring jurisdictions.

Changes in the MD's assessment base

Property taxes are levied against the assessed value of the various forms of property within a municipality. In the MD of Pincher Creek, property is divided into five classes: residential, farmland, non-residential, machinery and equipment, and electrical cogeneration. The first four classes are self-explanatory; the latter includes the hydroelectric generating facilities on the two reservoirs and the numerous wind turbines scattered across the landscape.

The different classes of property are assessed using different standards. Residential property is assessed at current market value; sales of residential property within the MD are tracked and the assessed values of similar properties are adjusted accordingly. The assessment standards applied to many of the other property classes, such as farmland and machinery and equipment, are established by provincial regulations.

Every year the municipal assessment roll is updated and reissued, and every year the valuations it contains evolve somewhat due to shifts in resale markets and owners adding or disposing of property. The changes for 2018, however, were much greater than in recent years. This is due to two principal factors: first, a complete reassessment of rural properties performed throughout the MD that resulted in a significant increase in residential valuations; second, a major evaluation of industrial properties that resulted in a dramatic decrease in the valuation of machinery and equipment.

The graphics below illustrate the composition of the total assessment base for the 2017 and 2018 tax years, together with the year over year change in the assessment for each class of property, expressed both as a dollar change and a percentage change from 2017 (see NOTE 1).

As is shown by the graphs, the assessed values of all classes of commercial and industrial property within the MD have decreased significantly. The total assessed values of non-residential and electrical cogeneration properties have decreased by roughly $10-million and $9-million respectively; machinery and equipment has decreased by over $38-million. Collectively, this represents a decrease of over $57-million in the assessed value of commercial and industrial property.

The assessed value of farmland is basically unchanged from 2017; the decrease of $1,500 on roughly $59-million is too small to even register on the graphs.

In contrast to the decline in industrial valuations, the assessed value of residential property has increased $26,185,380, or 5.1 percent. An estimate provided by the municipality's assessor indicates that roughly 25 percent of that increase is the value of new construction - houses that weren't there the year before - with the balance of the $26-million attributed to increased valuations of pre-existing homes. The implications of that breakdown for the expected tax payable on an existing residential property are set out in the notes below (see NOTE 2).

There are two important takeaways from this data. First, the total value of assessed property within the MD has decreased $31,460,490, or two percent overall. Second, the composition of the assessment base has shifted slightly, with residential property now making up a slightly larger portion of the whole. 

These facts are reflected in the two pie charts above. In 2017, residential property comprised exactly a third of the total assessment; that proportion has now increased to 35.7 percent. Conversely, machinery and equipment comprised 14.1 percent of the 2017 assessment, but has now decreased to 11.8 percent. The portions of the total assessment accounted for by non-residential, electrical cogeneration and farmland are virtually unchanged. The overall result is an almost perfect 60/40 split, with commercial and industrial property comprising 60.4 percent of the total assessment, and residential property and farmland comprising 39.6 percent.

This small shift in the composition of the assessment base might suggest that a long term increase in the tax burden on residential properties is inevitable, but that is not necessarily the case. The relationship between tax rates, tax levies and the assessment base is determined by Council, a subject we turn to in the next section.

The assessment base and tax levies

The two charts below illustrate the composition of the MD's assessment base and the composition of the general municipal levy, by property class. There is no prescribed relationship between the assessment base and the tax levies; how the total municipal levy maps onto the assessment base is decided each year by Council.

As is clear from the charts, owners of residential property enjoy a significant tax advantage as a result of this process. Residential property comprises over a third of the assessment base, but owners of residential property pay less than a quarter of general municipal taxes. Conversely, owners of the various forms of commercial and industrial property carry a disproportionately higher share of the general municipal tax load. There are various reasons for this, mostly political in nature, but it is a common feature of property tax systems across a broad range of municipalities.

In townships, residential property generally comprises the bulk of the assessment base, whereas in rural municipal districts it usually comprises a minority share. There is thus a significant difference in the tax structure of an average township versus an average MD. There are also differences between individual townships in the way they choose to distribute the tax load across the various classes of property, and similarly between MDs. But whatever the other differences, residential property enjoys the lowest tax rate in virtually all municipalities.

The degree of tax advantage that a Council can confer on residential property is constrained by the Municipal Government Act (MGA). Specifically, the ratio of the highest non-residential tax rate to the lowest residential tax rate cannot exceed five to one. A complete exposition of the other legislative constraints on tax rates would take us too far afield, but the details can be found in Sections 353 through 358 of the MGA.

The following are the non-residential to residential tax rate ratios for the MD of Pincher Creek and neighbouring municipal districts for 2017, the most recent year for which complete data is available: MD of Ranchland 1.5, MD of Pincher Creek 1.85, Lethbridge County 2.0, MD of Willow Creek 2.2, Cardston County 4.2. Of the MDs in this corner of the province, Cardston County alone is pursuing an aggressive policy in this respect, with a non-residential tax rate that is 4.2 times that applied to residential property. The rate multiples within the other four MDs fall within the relatively narrow range of 1.5 to 2.2.

For 2018, the multiple for the MD of Pincher Creek has increased from 1.85 to 1.92, a shift too small to signify any meaningful change in policy. There is, of course, no right number for this ratio. The degree of tax advantage conferred on residential property depends entirely on the objective of a Council's overall tax policy, a subject that we turn to next.

Choosing annual property tax rates and levies

The MD's annual budget sets out the total expenditures for the fiscal year and contains estimates of the revenues to be obtained from all sources, including property taxes. The total amount to be levied in property taxes is thus predetermined by the budget. For 2018, that amount is $10,947,840. The property tax bylaw establishes a number of tax rates that will, when applied to the assessed values of the various classes of taxable property, yield the required $10,947,840. Who pays how much of that $10,947,840 is decided by Council.

Council enjoys a great deal of flexibility in deciding how to apportion the total property tax load across the various classes of property. In a best case scenario, the tax rates and tax levies set out in the property tax bylaw serve to implement a clear policy objective. Council might, for instance, wish to establish a very low tax rate for residential property in order to encourage residential construction and population growth, or might wish to divide non-residential property into sub-classes in order to establish a preferential tax rate to encourage particular forms of commercial activity. The following two tables present concrete examples illustrating this concept. The third table presents the actual 2018 rates and levies for the MD.

Consider a scenario in which Council was firmly dedicated to protecting farmers and establishing the lowest residential rates possible. The table above presents the tax rates and levies that would result if Council's chosen objective were to leave the levy on farmland unchanged from 2017 and cut the residential tax levy in half. 

This set of rates and levies meets the MD's actual 2018 revenue requirements while reducing the municipal tax load on owners of residential property by $1,131,158. Pursuing this objective would result in a ratio of non-residential to residential tax rates of 4.9, which is right at the limit of what is permissible under the governing legislation. 

This example is not intended to suggest that cutting the residential levy in half would be an advisable or even defensible policy choice. It simply serves to illustrate the degree of latitude that is available to Council when deciding how to distribute the property tax burden.

In terms of comparison with the tax structures of neighbouring jurisdictions, it is worth noting that even this most radical example results in a tax rate on non-residential property that is less than the corresponding rates in the Town of Pincher Creek, Crowsnest Pass, and Cardston County.

In this second example, the table above presents the tax rates and levies that would result if Council's chosen objective were to limit the year over year increase in the levies against residential property and farmland to three percent. This is a completely realistic policy objective that would result in a $67,888 increase in the residential levy and an $11,219 increase in the levy against farmland for 2018. Pursuing this objective would result in a ratio of non-residential to residential tax rates of 2.1, which is directly in line with the corresponding ratios in the Municipal District of Willow Creek and Lethbridge County. 

This final table presents the actual tax rates and tax levies set out in the 2018 property tax bylaw. This set of rates has resulted in a $222,265 increase in the residential tax levy, and a non-residential to residential tax rate ratio of 1.92. The objectives that guided the selection of this set of figures is a topic best explored directly with members of Council. A detailed presentation of the discussions that led to this decision - discussions that spanned three committee meetings and two council meetings - is well beyond the scope of this article.

Residential mill rates compared

In this final section, we'll take a short look at some comparative data from neighbouring municipalities. The graph below presents the general municipal mill rates for residential property in the five municipal districts and five major townships in the southwestern corner of the province. Note that the mill rates for the Pincher Creek Emergency Services Commission are included in the graph in order to provide an apples to apples comparison; in the other jurisdictions shown, the costs of fire and ambulance protection are covered by general municipal taxes. Note also that these are 2017 figures, the most recent year for which complete comparative data is available.

A couple of things immediately jump out of this comparison. First, the residential mill rates in municipal districts, shown in green, are uniformly lower than the corresponding rates in townships, shown in blue (NOTE 3). This is a common situation throughout the province. Second, the residential mill rate in the Town of Pincher Creek is a clear outlier, being markedly higher than the rates imposed by other municipalities in the region.

The residential mill rate in the MD of Pincher Creek, inclusive of emergency services charges, is on the high end of the range for regional municipal districts, but very much in line with the rates in Ranchland and Lethbridge County. The rate in Cardston County is significantly lower as a result of the aggressive tax policy pursued by that municipality's council. The rate in the MD of Willow Creek is lower still, as a result of a large commercial and industrial base which carries the majority of the tax load in that municipality. Overall, residential rates in the municipal districts fall within a relatively narrow range of 1.2 points of mill rate, varying from 3.4 to 4.6.

Turning to the townships, residential rates in Fort Macleod, Crowsnest Pass, Claresholm and Cardston fall within a range of 1.4 points of mill rate, varying from roughly 6.0 to 7.4. Pincher Creek, with a residential rate inclusive of emergency services charges in excess of 9.6, is basically in a category of its own.

Comparisons of property tax rates must be approached with some care, as there may exist significant differences in the levels of service and quality of amenities in different communities. Nonetheless, it is clear that there are huge disparities in rates among communities within the region.

A final word on citizen participation

As a final word to residents of the MD, be aware that the entire process leading to the passage of the annual property tax bylaw is open to the public each year from start to finish. These are important decisions that directly affect every property owner in the municipality. The door is open for anyone wishing to listen to the discussions and provide feedback to the members of Council. The opportunity to understand how your Council sets your taxes, and to provide input into that process, is one of your most basic rights as a citizen. Avail yourself of it.

Related article: MD of Pincher Creek releases 2018 property tax rates 

NOTE 1: With the exception of the 2017 residential tax rate for the Municipal District of Willow Creek, for which a secondary source was employed, all figures used in the creation of the graphics were drawn directly from the property tax bylaws of the municipalities in question.

NOTE 2: To determine the average increase in taxes on pre-existing residential property it is necessary to decompose the total residential levy into two parts. The municipal assessor indicated that approximately 25 percent of the increase in the residential assessment for 2018 was due to new construction, with the balance being increased valuations of pre-existing housing.

Applying that estimate to the figures in the tax bylaws yields the following residential levies for 2018: $30,112 payable on the value of new construction and $2,454,514 payable on pre-existing housing. That represents an average increase of 8.5 percent in general municipal tax payable on pre-existing residential property for 2018.

It is important to understand that this is an aggregate figure representing the total increase across the MD. Details from the residential assessment indicate that the increases in the valuations of homes located in hamlets are relatively small, while the increases in the assessed values of rural residences are significant. The increase in general municipal tax payable on any particular property may therefore deviate substantially from the 8.5 percent average, depending on the exact change in the assessed value of the property in question.

NOTE 3: Crowsnest Pass isn't technically a township, but in composition and tax structure much more closely resembles a town than a rural municipal district.

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